WORLD TRADE  
ORGANIZATION  G/SCM/Q2/CHN/27 
13 September 2007 
 (07-3826) 
Committee on Subsidies 
and Countervailing Measures Original:   English 
 
 
 
SUBSIDIES 
 
Replies to the Questions Posed by CANADA1  
Regarding the New and Full Notification of CHINA2 
  
 The following communication, dated 7 September 2007, is being circulated at the request of 
the Delegation of China.    
_______________ 
 
 
Question 1  I. PREFERENTIAL TAX POLICIES FOR FOREIGN-INVESTED ENTERPRISES  
 Based on the description of this program, it a ppears that the entire portion of enterprise 
income tax that has been paid on any direct re-in vestment in China by foreign investors in the 
organization or expansion of export oriented ent erprises, may be refunded.  To the extent that 
incentives through this programme are continge nt upon export performance, this programme 
could be considered a prohibited subsidy as provided under Article 3 of the Agreement on 
Subsidies and Countervailing Measures (ASCM).   
 
• Please explain how this programme comp lies with China's WTO commitment under 
Article 3.1(a) of the ASCM not to provide prohibited subsidies.   
 
Reply
 
 
 This policy will be adjusted with the implem entation of the new Income Tax Law of the 
People's Republic of China for En terprises on 1 January 2008.   
 
• Could China also provide information regarding the amount of tax forgone under this 
programme and the industries which have been the largest users of the programme?  
 Reply
 
  The amount of tax forgone as a result of the im plementation of preferential tax policies is not 
available because currently China does not have a sta tistics system for tax expenditure.  It is still in 
the process of being established.   
 
                                                     
 
1 G/SCM/Q2/CHN/18.   
2 G/SCM/N/123/CHN.   G/SCM/Q2/CHN/27 
Page 2  
 
   On the question regarding the users of this polic y, China also is unable to provide information 
because the policy is not specific to any particular in dustry.  It is applicable to all production-oriented 
foreign invested enterprises regardl ess which industries they are in.   
 
Question 2 
 
II. PREFERENTIAL TAX POLICIES FO R FOREIGN-INVESTED EXPORT 
ENTERPRISES   
 Based on the description of this programme, it  appears that foreign invested enterprises 
that export more than 70 per cent of their products, or that utilize foreign advanced technology 
to produce products for export, have their tax rate cut in half.  As incentives through this 
programme are contingent upon export performan ce, this program appears to be a prohibited 
subsidy as provided under Article 3 of th e Agreement on Subsidies and Countervailing 
Measures (ASCM).    
• Please explain how this programme comp lies with China's WTO commitment under 
Article 3.1(a) of the ASCM not to provide prohibited subsidies.   
 
Reply
 
  This policy will be adjusted with the implem entation of the new Income Tax Law of the 
People's Republic of China for En terprises on 1 January 2008.   
 
• Could China also provide information regarding the amount of tax forgone under this 
programme and the industries which have been the largest users of the programme?   
 
Reply
 
 
 As the case in question 1, the amount of tax forgone as a result of the implementation of 
preferential tax policies is not available because cu rrently China does not have a statistics system for 
tax expenditure.  It is still in th e process of being established.   
  On the question regarding users of the policy, China also is not able to provide information 
because the policy is not specific to any particular in dustry.  It is applicable to all production-oriented 
foreign invested enterprises regardl ess which industries they are in.   
 
Question 3 
 XIV. PREFERENTIAL TAX POLICIES IN THE WESTERN REGIONS 
 This programme is described as providing preferential tax treatment (i.e., tax rate 
reductions) for domestic and foreign-invested "industries encouraged by the State", established 
in the western regions.  Are there any expo rt-performance (or import-substitution) 
requirements associated with indus tries encouraged by the State? 
 Reply
 
  According to the Circular Cai Shui No. 202 of 2001 jointly issued by Ministry of Finance, 
State Administration of Taxation and General Admi nistration of Customs, "domestic enterprises of 
industries encouraged by the State" refer to th ose enterprises whose main business is listed in the 
Current Catalogue of Industries, Products and Technologies Particularly Encouraged by the State and 
the said main business covers no less than 70 per cent of their total income;  while "foreign invested  G/SCM/Q2/CHN/27 
 Page 3 
 
 
  enterprises of the industries encouraged by the State"  refer to those enterprises whose main business is 
listed in the Catalogue for the Guidance of Foreign Investment Industries or Catalogue of Priority 
Industries for Foreign Investment in Central a nd Western Region and the said main business covers 
no less than 70 per cent of their total income.    
 In respect of the Current Catalogue of Indus tries, Products and Technologies Particularly 
Encouraged by the State mentioned above, it has be en replaced by the Catal ogue for the Guidance of 
Industrial Structure Adjustment (2005), which wa s issued by National Development and Reform 
Commission (NDRC) in its Decree No. 40 of  2005. The new Catalogue was effective on 
2 December 2005.   
 
 Regarding the Catalogue for the Guidance of Industries for Foreign Investment, the version currently in force was issued by  the NDRC in its Decree No. 24 of 2005, which became effective on 
1 January 2005.  Further revision of  the Catalogue is under way.   
 
 In terms of the Catalogue of Priority Industri es for Foreign Investment in Central and Western 
Region, the version currently in force was promulga ted in Decree No. 13 jointly issued by the NDRC 
and MOFCOM on 23 July 2004.  It became effective on 1 September of the same year.    
Question 4 
 
XXIII. PREFERENTIAL TAX POLICIES FOR ENTERPRISES MAKING LITTLE 
PROFITS   
 The intent of this programme is described as being "to reduce the burden of enterprises 
making little profits to maintain job opportuni ties".  In this regard, we understand that the 
programme provides for scaled income tax reduction s based on an levels of income, with the 
income tax level of enterprises with an annual taxable income of less than RMB 30,000 being 
reduced to eighteen per cent and that of enterprises with an annual taxable income of less than RMB 100,000 but more than RMB 30,000 being reduced to twenty-seven per cent.  In this regard:  
• Are these tax reductions available across industr ial sectors or are they limited to specific 
industries/enterprises?  If the latter, which industries/enterprises are covered? 
 
Reply
 
 
 These tax reductions are available to domest ic enterprises across all industrial sectors. 
 
• Where a firm operates at a loss in a particular tax year, can it carry forward part or 
totality of the loss to a subsequent year to  reduce taxable income and therefore benefit 
from a lower tax rate in that year?   
 
Reply  
 
 According to Article 11 of the Interim Regula tions of the People's Republic of China on 
Income Tax for Enterprises (State Council Decree  No.137) promulgated on 13 December 1993, the 
losses of a tax-payer may be offset against its ta xable income in the following year.  In case the 
taxable income of next year cannot offset the losse s in the preceding year, the balance may be offset 
in the third year.  However, the carry-forward shall be no more than 5 years.   G/SCM/Q2/CHN/27 
Page 4  
 
  Question 5 
 LVIII. PREFERENTIAL TAX POLICIES FO R FOREIGN-INVESTED ENTERPRISES AND 
FOREIGN ENTERPRISES WHICH HAVE ESTABLISHMENTS OR PLACE IN 
CHINA AND ARE ENGAGED IN PRODUCTION OR BUSINESS OPERATIONS 
PURCHASING DOMESTICALLY PRODUCED EQUIPMENTS 
 Based on the description of this programme, it appears that foreign-invested enterprises 
and foreign enterprises are provided preferenti al tax treatment to purchase domestically 
produced equipment.  As incentives through this programme are specific to purchases of 
domestically produced equipment, this program me appears to be a prohibited subsidy as 
provided under Article 3 of the Agreement on Subsidies and Countervailing Measures (ASCM).   
 
• Please explain how this programme comp lies with China's WTO commitment under 
Article 3.1(b) of the ASCM not to provide prohibited subsidies.   
 
Reply
 
 
 This policy will be adjusted with the implem entation of the new Income Tax Law of the 
People's Republic of China for En terprises on 1 January 2008.   
 
• Could China also provide information regarding the amount of tax forgone under this 
programme and the industries which have been the largest users of the programme?   
 Reply
 
  As explained earlier, the amount of tax forgone as a result of the implementation of 
preferential tax policies is not available because curr ent China does not have a statistics system for tax 
expenditure.  It is still in the process of being established.    
• In addition, could China please supply the legislation which provides the legal 
definitions for what constitute proces sing trades and compensation trades? 
 
Reply
 
 
 The processing trade and compensation trade in  early days of China's opening-up were 
referred to as "three types of processing and compensation trades" (that is, processing with raw materials imported, processing by assembling imported components and spare parts, processing with given sample and design, and compensation tr ade).  According to the Provisional Rules on 
Administration and Approval of Processing Trade issued  by the former Ministry of Foreign Trade and 
Economic Cooperation on 27 may 1999, "processing trade" means the business activity of bonded 
import from abroad of all or some raw and sec ondary materials, spare parts and components and 
packing materials and re-export of finished products  after processing or assembling by enterprise in 
China.     According to Measures on Developing Foreign Processing and Assembling and 
Compensation Trade at Small and Medium Scale is sued by the State Council in 1979, compensation 
trade means that domestic enterprises engage in production with technologies, equipments and 
necessary materials provided by foreign investors,  which are compensated by the products of the 
domestic enterprises.     G/SCM/Q2/CHN/27 
 Page 5 
 
 
  Question 6 
 LIX. PREFERENTIAL TAX POLICIES FO R DOMESTIC ENTERPRISES PURCHASING 
DOMESTICALLY PRODUCED EQUIPMENTS FOR TECHNOLOGY UPGRADING PURPOSE   
 Based on the description of this programme, it appears that domestic enterprises are 
provided preferential tax treatment to purcha se domestically produced equipment.  As 
incentives through this program are specific to purchases of domestically produced equipment, 
this programme appears to be a prohibited  subsidy as provided under Article 3 of the 
Agreement on Subsidies and Countervailing Measures (ASCM).   
 
• Please explain how this programme co mplies with China's commitment under 
Article 3.1(b) of the ASCM not to provide prohibited subsidies.   
 
Reply
 
 
 This policy will be adjusted with the implem entation of the new Income Tax Law of the 
People's Republic of China for En terprises on 1 January 2008.   
 
• Could China also provide information regarding the amount of tax forgone under this 
programme and the industries which have been the largest users of the programme?   
 
Reply  
 
 As explained earlier, the amount of tax forgone as a result of the implementation of 
preferential tax policies is not available because curr ent China does not have a statistics system for tax 
expenditure.  It is still in the process of being established.    
• In addition, could China provide the legislation that defines which technological 
renovation projects would be in complia nce with State industrial policies? 
 
Reply
 
  According to Article 6 and 7 of the Ministry of Finance Circular Cai Shui No. 290 of 1999, 
projects consistent with state industr ial policies refer to those consiste nt with the Current Priorities for 
Fixed Assets Investment in Industrial and Commercial Sectors issued by State Economic and Trade Commission (SETC) in its Circular Guo Jing Mao Tou Zi No.256 of 1999.  However, the Current 
Priorities for Fixed Assets Investment in Industrial and Commercial Sectors issued by SETC in 1999 has been replaced by the Catalogue for the Guidance of Industrial St ructure Adjustment (2005), which 
was issued by National Development and Reform  Commission in its Decree No. 40 of 2005.   
 
Question 7 
 
LXXVI. PREFERENTIAL TAX TREATMENT FOR CASTING AND FORGING PRODUCTS 
 
• Please explain in further detail the conditions that must be met for a company to qualify 
for refunds under this programme.   G/SCM/Q2/CHN/27 
Page 6  
 
  Reply
 
  According to the Circular Cai Shui No. 96 of 2003 jointly issued by the Ministry of Finance 
and State Administration of Taxation, casting and fo rging products from the 284 enterprises listed in 
the annex to the Circular can enjoy VAT rebate.  The tax-payer should declare and pay the full 
amount of payable tax in time, and the taxatio n administration will then refund them certain 
percentage of the VAT paid after verification.    
• Please explain the eligibility criteria used in  the selection of the 284 approved domestic 
enterprises from which the casting and forging products must be purchased in order to qualify for the preferential tax treatment.   
 
Reply
 
  From the wording of the question it seems that the policy is misunderstood by Canada.  This 
policy allows refund to 284 enterprises of certain pe rcentage of the VAT they pay for their casting and 
forging products.  It is not refund to buyers.  The criteria for selection of the enterprises include output 
of the enterprise, added value of the products , technology level, energy consumption level, 
environment protection standards, etc.    
• Has this programme been extended beyond 20 05 or has a similar one been created?   
 
Reply
 
 
 A Circular had been issued by the Ministry of Finance and State Administration of Taxation, 
extending the policy to the end of 2008.    
• Could China provide information regarding the amount of tax forgone under this 
programme?   
 
Reply
 
  As explained earlier, the amount of tax forgone as a result of the implementation of 
preferential tax policies is not available because cu rrently China does not have a statistics system for 
tax expenditure.  It is still in th e process of being established.   
 
• Please explain how this programme co mplies with China's commitment under 
Article 3.1(b) of the ASCM not to provide prohibited subsidies. 
 
Reply
 
 
 After reform of the tax regime in 1994, the casting and forging enterp rises turned to pay VAT 
instead of the previous product tax.  As a result, their tax burden was heavier.   To reduce to certain 
extent the tax burden of these enterprises for smooth adaptation to the new tax regime, the 
Government decided to refund them a certain percen tage of their VAT paid.  The criteria for selection 
of the applicable enterprises include output of th e enterprise, added value of the products, technology 
level, energy consumption level, environment protect ion standards, etc.  This policy allows refund to 
284 enterprises meeting the above criteria of a certain percentage of the VAT they pay for their casting and forging products.  It is not refund to buyers, and there is no problem of import 
substitution.  This policy therefore should not be classified as the prohibited subsidy as defined in 
Article 3 of the SCM Agreement.    G/SCM/Q2/CHN/27 
 Page 7 
 
 
  Question 8 
 
LXXVII. PREFERENTIAL TAX TREA TMENT TO DIES PRODUCTS  
 
• Please explain in further detail the conditions that must be met for a company to qualify 
for refunds under this programme.   
 
Reply  
  According to the Circular Cai Shui No. 95 of 2003 jointly issued by the Ministry of Finance 
and State Administration of Taxation, dies products from the 160 enterprises listed in the annex to the 
Circular can enjoy VAT rebate.  The tax-payer s hould declare and pay the full amount of payable tax 
in time, and the taxation administration will then refund them certain percentage of the VAT paid 
after verification.    
• Please explain the eligibility criteria used in  the selection of the 160 approved domestic 
enterprises from which the casting and forging products must be purchased in order to 
qualify for the preferential tax treatment.   
 
Reply
 
  From the wording of the question it seems that the policy is misunderstood by Canada.  This 
policy allows refund to 160 enterprises of certain pe rcentage of the VAT they pay for their dies 
products.  It is not refund to buyers.  The criteria for selection of the enterprises include output of the 
enterprise, added value of the products, technolog y level, energy consump tion level, environment 
protection standards, etc.    
• Has this programme been extended beyond 20 05 or has a similar one been created?   
 Reply
 
  Before expiration of this policy on 31 Decembe r 2005, a Circular had been issued by the 
Ministry of Finance and State Administration of Taxation, extending the policy to the end of 2008.  
The Circular also reduced the refund percentage from 70 per cent to 50 per cent.   
 
• Could China provide information regarding the amount of tax forgone under this 
programme?   
 
Reply
 
  As explained earlier, the amount of tax forgone as a result of the implementation of 
preferential tax policies is not available because curr ent China does not have a statistics system for tax 
expenditure.  It is still in the process of being established.  
• Please explain how this programme co mplies with China's commitment under 
Article 3.1(b) of the ASCM not to provide prohibited subsidies.  G/SCM/Q2/CHN/27 
Page 8  
 
    
Reply
 
  Background of the policy concerning the dies produc ts was basically the same as that of the 
casting and forging products.  After reform of  the tax regime in 1994, the dies manufacturing 
enterprises turned to pay VAT instead of the previous  product tax.  As a result, their tax burden was 
heavier.  To reduce to certain extent the tax bur den of these enterprises for smooth adaptation to the 
new tax regime, the Government decided to refund th em a certain percentage of their VAT paid.  The 
criteria for selection of the applicable enterprises in clude output of the enterprise, added value of the 
products, technology level, energy consumption level,  environment protection standards, etc.  This 
policy allows refund to 160 enterprises meeting the a bove criteria of a certain percentage of the VAT 
they pay for their dies products.  It is not refund  to buyers, and there is no problem of import 
substitution.  This policy therefore should not be classified as the prohibited subsidy as defined in 
Article 3 of the SCM Agreement.    Question 9  LXXVIII.  PREFERENTIAL TAX TREATMENT TO NUMERICALLY CONTROLLED 
 MACHINE TOOL PRODUCTS   
 
• Please explain in further detail the conditions that must be met for a company to qualify 
for refunds under this programme.   
 
Reply
 
  According to the Circular Cai Shui No. 97 of 2003 jointly issued by the Ministry of Finance 
and State Administration of Taxation, numerically controlled machine tool products from enterprises 
listed in the annex to the Circular can enjoy VAT rebate.  The tax-payer should declare and pay the 
full amount of payable tax in time, and the taxa tion administration will then refund them certain 
percentage of the VAT paid after verification.    
• Please explain the eligibility criteria used in the selection of the approved domestic 
enterprises from which the casting and forging products must be purchased in order to 
qualify for the preferential tax treatment.   
 
Reply
 
  From the wording of the question it seems that the policy is misunderstood by Canada.  This 
policy allows refund to numerically controlled machin e tool manufacturers of certain percentage of 
the VAT they pay for their products.  It is not re fund to buyers.  The criteria for selection of the 
enterprises include output of the enterprise, added value of the products, technology level, energy 
consumption level, environment protection standards, etc.   
 
• Has this programme been extended beyond 20 05 or has a similar one been created?   
 Reply
 
  Before expiration of this policy on 31 Decembe r 2005, a Circular had been issued by the 
Ministry of Finance and State Administration of Taxation, extending the policy to the end of 2008.  
The refund percentage was also changed to 50 per cent.  
• Could China provide information regarding the amount of tax forgone under this 
programme?    G/SCM/Q2/CHN/27 
 Page 9 
 
 
   
Reply  
  As explained earlier, the amount of tax forgone as a result of the implementation of 
preferential tax policies is not available because curr ent China does not have a statistics system for tax 
expenditure.  It is still in the process of being established.   
 
• Please explain how this programme co mplies with China's commitment under 
Article 3.1(b) of the ASCM not to provide prohibited subsidies. 
 
Reply
 
 
 Background of the policy concerning the numerical ly controlled machine tool products was 
basically the same as that of the casting and forg ing products and the dies pr oducts.  After reform of 
the tax regime in 1994, the numerically controlled machine tool manufacturing enterprises turned to 
pay VAT instead of the previous product tax.  As a result, their tax burden was heavier.  To reduce to 
certain extent the tax burden of these enterprises for smooth adaptation to the new tax regime, the 
Government decided to refund them a certain percen tage of their VAT paid.  The criteria for selection 
of the applicable enterprises include output of the enterprise, added value of the products, energy 
consumption level, environment prot ection standards, etc.  This policy allows refund to enterprises 
meeting the above criteria of a certain percentage  of the VAT they paid for their numerically 
controlled machine tool products.  It is not ref und to buyers, and there is no problem of import 
substitution.  This policy therefore should not be classified as the prohibited subsidy as defined in 
Article 3 of the SCM Agreement.    
Question 10 
 
 Canada is aware of a number of other specif ic subsidies provided by the government of 
China, which were not notified in China's 2006 New and Full Notification pursuant to Article 25 
of the Agreement on Subsidies and Counterva iling Measures (ASCM).  Could China please 
provide information regarding the following programmes:  (a) VAT refunds on domestic equipment purchas es for foreign-invested enterprises that 
buy new domestic equipment instead of new imported equipment, as provided for in 
Article 4 of the Interim Measure for the Administration of Tax Refund to Enterprises with Foreign Investment fo r their Domestic Equipmen t Purchases [GuoShuiFa 1999 
No. 171] 
 
• Could China please provide an explanation as to why this programme was not 
notified in China's subsidy notification?   
 
Reply
 
  The policy of the Circular Guo Shui Fa 1999 No . 171 was not included in China's notification 
because it does not intend to subsidize the domestic e quipments.  In fact, the purpose of the policy is 
to equalize the tax burden of domestic equipments and imported equipments when they are purchased by a foreign-invested enterprise.  In respect of the tax refund to fo reign-invested enterprises for their 
imported equipments, please refer to Item 60 of Ch ina's notification.  This, which exempted the 
foreign-invested enterprises satisfying certain terms and conditions from the import tariff and VAT 
for the imported equipments they purchased, was im plemented even before the Circular Guo Shui 
Fa 1999 No. 171 in order to encourage foreign investme nt.  Therefore, the Circular Guo Shui Fa 1999 
No. 171 only equalized the tax burden between domes tic equipments and imported equipments, and 
China believes that it should not be regarded  as a subsidy for domestic equipments.   G/SCM/Q2/CHN/27 
Page 10  
 
   
• In addition, could China please explain how this programme complies with China's 
WTO obligations, particularly with regards to Article 3.1(b) of the ASCM?   
 
Reply
 
 
 In view of the explanation for the question ab ove, China believes that this policy is not a 
prohibited subsidy as defined in Article 3 1(b) of the SCM Agreement, and should not be regarded as 
inconsistent with China's WTO obligation.    
• Could China also provide information regarding the amount of VAT forgone under 
this programme and the industries which have been the largest users of the 
programme?  
 
Reply
 
  As explained earlier, the amount of tax forgone as a result of the implementation of 
preferential tax policies is not available because curr ent China does not have a statistics system for tax 
expenditure.  It is still in the process of being established.    
(b) Foreign-invested enterprises th at export more than 50 per cent of their products, or that 
utilize foreign advanced technology to produ ce products for export, are exempt from 
mandatory contributions that help the Chinese government pay for worker/staff 
benefits.  This subsidy is provided for in Article 3 of the Provisions of the State Council 
on the Encouragement of Foreign Investment [GuoFa 1986 No. 95] 
 
• Could China please provide an explanation as to why this programme was not 
notified in China's subsidy notification?   
 Reply
 
  This policy was not included in the subsid y notification China submitted because it was 
terminated as early as on 1 January 2002.    
• In addition, could China please explain how this programme complies with China's 
WTO obligations, particularly with regards to Article 3.1(a) of the ASCM?   
 
Reply
 
  In view of the answer to the previous qu estion, China believes that there is nothing 
inconsistent with China's WTO obligation.   
 
• Could China also provide information regarding the specific payments forgone 
under this programme and the amount these payments represent as well as the industries which have been the largest users of the programme?  
 
Reply
 
 
 China does not have statistics in this regard.    G/SCM/Q2/CHN/27 
 Page 11 
 
 
  (c) Profits distributed to foreign investors by foreign-invested enterpri ses that export more 
than 50 per cent of their products, or th at utilize foreign advanced technology to 
produce products for export, are exempt from income tax.  This subsidy is provided for 
in Article 7 of the Provisions of the State Council on the Encouragement of Foreign Investment [GuoFa 1986 No. 95] 
 
• Could China please provide an explanation as to why this programme was not 
notified in China's subsidy notification? 
 
Reply
 
 
 This policy was replaced by Article 19 paragra ph 3.1 of 1991 Income Tax Law of the People's 
Republic of China for Enterprises with Foreign Inv estment and Foreign Enterprises.  The said article 
provided that the profits derived by a foreign invest or from an enterprise with foreign investment shall 
be exempt from income tax, which means that the exemption has been applied to all foreign investors 
instead of only investors of foreign-invested ente rprises that export more than 50 per cent of their 
products, or that utilize foreign advanced technology.   China believes that the policy as provided in 
Article 19 paragraph 3.1 of 1991 Income Tax Law of  the People's Republic of China for Enterprises 
with Foreign Investment and Foreign Enterprises  is a policy to encourage and attract foreign 
investment.  It is not a specific subsidy as defi ned in the SCM Agreement which is subject to 
notification.  Therefore it is not included in  the subsidy notification China submitted.   
 
• In addition, could China please explain how this programme complies with China's 
WTO obligations, particularly with regards to Article 3.1(a) of the ASCM? 
 
Reply  
  In view of the answer to the previous questi on, China believes there is nothing inconsistent 
with China's WTO obligation.   
 
• Could China also provide information regar ding the amount of income tax forgone 
under this programme and the industries which have been the largest users of the programme?   
 Reply
 
  As explained earlier, the amount of tax forgone as a result of the implementation of 
preferential tax policies is not available because curr ent China does not have a statistics system for tax 
expenditure.  It is still in the process of being established.    (d) Export products of enterprises with foreign  investment, except crude oil, oil products 
and other products subject to special State provisions, shall be exempt from the consolidated and commercial tax.  This subsidy is provided for in Article 11 of 
Provisions of the State Council on the Encouragement of Foreign Investment [GuoFa 1986 No. 95] 
 
• Could China please provide an explanation as to  why this programme was not notified in 
China's subsidy notification?   G/SCM/Q2/CHN/27 
Page 12  
 
  Reply
 
  China's current tax regime w as established with the tax regime reform in 1994.  The 
"industrial and commercial consolidated tax" was a ty pe of tax before the re form, and was terminated 
in the 1994 Reform.   
 
• In addition, could China please explain how this programme complies with China's 
WTO obligations, particularly with regards to Article 3.1(a) of the ASCM?   
 
Reply
 
 
 In view of the answer to the previous questi on, China believes there is nothing inconsistent 
with China's WTO obligation.    
• Could China please provide an explanation of, as well as the legislation guiding, 
"consolidated and commercial tax"? 
 Reply
 
  The "industrial and commercial consolidated tax" was one of the major tax categories in 
China between 1958 and 1972.  It was a turnover tax imposed on industria l products, part of 
agricultural products, commercial retail, transpor tation and other service sectors.  Legislation 
concerned was the Regulations of the People's Republic of China on Industrial and Commercial 
Consolidated Tax (Draft).  The said legislati on entered in force on 13 September 1958 after the 101 
Session of the Standing Committee of National Pe ople's Congress adopted the Decision on Approval 
of the Regulations of the People's Republic of Ch ina on Industrial and Commercial Consolidated Tax 
(Draft) on 11 September 1958.  After the tax regime  reform in 1973, the Industrial and Commercial 
Consolidated Tax was only imposed on FIEs, and the tax imposed on domestic enterprises was 
incorporated into Industrial and Commercial Tax.  The tax regime reform of  1994 finally abolished 
the Industrial and Commercial Consolidated Tax,  replacing it with VAT, excise (consumption) tax 
and business tax which are the same between domestic  and foreign invested enterprises with a five 
year transitional period.  It was then that Indus trial and Commercial Conso lidated Tax was finally 
abolished in China.   
 
• Could China also provide information regar ding the amount of consolidated and 
commercial tax forgone under this program me and the industries which have been 
the largest users of the programme?   
 
Reply
 
 
 China does not have statistics in this regard.   
 
(e) Imported products used by  foreign-invested enterprises to produce goods for export are 
exempt from import licensing and other impo rt procedural requirements.  This subsidy 
is provided for in Article 13 of the Provisions of the State Council on the Encouragement 
of Foreign Investment [GuoFa 1986 No. 95] 
 
• Could China please provide an explanation as to why this program was not notified 
in China's subsidy notification?  G/SCM/Q2/CHN/27 
 Page 13 
 
 
  Reply  
  China believes that this is a kind of measure to encourage foreign investment through 
facilitating trade. It is also found in export processing zones or foreign trade zones of other countries.  There is neither situation as defined in Article 1. 1 (a) of the SCM Agreement nor benefit transfer, 
therefore should not be regarded as subsidy.   
 
• In addition, could China please explain how this program complies with China's 
WTO obligations, particularly with regards to Article 3.1(a) of the ASCM?   
 
Reply
 
 
 In view of the explanation to the question a bove, China believes there is nothing inconsistent 
with China's WTO obligation.    
• Could China also provide information regardi ng the cost of the procedural import 
requirements referred to under this programme and the industries which have been 
the largest users of the programme?   
 
Reply
 
  China is of the view that cost reduction as a result of trade facilitation measures should not be 
linked up with the issue of subsidy. Also, statistics as such are not available.   
 
(f) Foreign-invested enterprises that meet certain export criteria receive a 10 per cent 
discount on lending rates from the People's Ba nk of China.  This subsidy is provided for 
in Article 6 of the Detailed Rules on Rewarding and Punishment Concerning Provisional Regulations over Examination of Export Collections of Foreign Exchange [YinFa 2000 
No. 58] 
 
• Could China please provide an explanation as to why this programme was not 
notified in China's subsidy notification?   
 
Reply
 
 
 According to Circular Yin Fa No.250 of 203 issued by the People's Bank of China in 
December 2003, the interest rate of loans of co mmercial banks may fluctuate downward to 90 per cent 
of the benchmark rate issued by the People's Bank of  China.  Therefore when the subsidy notification 
was prepared, China believed that the said policy was not a subsidy.  Furthermore, according to Public 
Notice No.7 of 2007 jointly issued by the Pe ople's Bank of China, State Foreign Exchange 
Administration, Ministry of Commerce and State Administration of Taxation, the said policy was 
abolished in March 2007.    
• In addition, could China please explain how this program complies with China's 
WTO obligations, particularly with regards to Article 3.1(a) of the ASCM? 
 Reply
 
  In view of the answer to the question above, Ch ina believes there is nothing inconsistent with 
China's WTO obligation.   G/SCM/Q2/CHN/27 
Page 14  
 
  • Could China also provide data regarding the use of this programme, including the 
industries which are the highest users, th e actual rates received by benefiting 
enterprises, and the amount of interest foregone as a result of the programme? 
 
Reply
 
 
 China does not have statistics in this regard.   
 
(g) Catalytic agents, grinding materials and fu el that are imported by Enterprises with 
Foreign Investment and subse quently consumed in the production of goods for export, 
are exempt from import duties as well as from industrial and commercial consolidated 
tax.  This is provided for in Article 19 of the Measures of the Customs of the People's 
Republic of China on the Control over and the Levy and Exemption of Tax for Import 
and Export Goods of Enterprises with Foreign Investment.  
 
• Could China please provide an explanation as to why this program was not notified 
in China's subsidy notification? 
 
Reply  
  As explained earlier, the industrial and commercia l consolidated tax was terminated in 1994.  
As to import duty exemption, there was major polic y adjustment in 1995.  According to the State 
Council Circular No.34 of 1995, the import duty exemption mentioned in this question was 
terminated as of 1 April 1996.  Therefore the policy raised in the question was not included in China's 
notification.   
 
• In addition, could China please explain how this program complies with China's 
WTO obligations, particularly with regards to Article 3.1(a) of the ASCM?   
 Reply
 
  In view of the explanation to the question a bove, China believes there is nothing inconsistent 
with China's WTO obligation.    
• Could China please provide an explanation of, as well as the legislation guiding, 
"industrial and commercial consolidated tax"?   
 
Reply
 
  Please refer to the answer to Question 10 (d).    
• Could China also provide information regar ding the amount of import duties, and 
industrial and commercial consolidated tax forgone under this program and the 
industries which have been the largest users of the programme?  
 
Reply
 
 
 As explained earlier, the amount of tax forgone as a result of the implementation of 
preferential tax policies is not available because curr ent China does not have a statistics system for tax 
expenditure.  It is still in the process of being established.    G/SCM/Q2/CHN/27 
 Page 15 
 
 
  (h) "By-products, substandard products and le ftover industrial surplus" generated by FIEs 
while producing goods for export, are ex empt from repayment tax when sold 
domestically.  Such products, if genera ted while producing goods for domestic 
consumption are not exempt.  This subsidy is  provided for in Article 20 of the Measures 
of the Customs of the People's Republic of  China on the Control over and the Levy and 
Exemption of Tax for Import and Export Good s of Enterprises with Foreign Investment 
[Decree 1992 No. 29 of the General Administration of Customs] 
 
• Could China please provide an explanation as to why this programme was not 
notified in China's subsidy notification? 
 Reply
 
 
 The policy mentioned by Canada was terminated  by Public Notice No. 6 of 2004 issued by 
the General Administration of Customs.  Besides, from the wording of the question it seems that the 
policy is misunderstood by Canada.  The origin al wording of the policy was:  "by-products, 
substandard products, and leftover industrial raw materials of foreign invested enterprises while 
producing goods for export shall pa y tax (import duty) after approved by the Customs for selling 
domestically;  and the wastes confirmed to be of  no commercial value may be exempt from paying 
such tax (import duty)".  The reason behind the po licy is that the raw materials, fuels, parts, 
components, mechanical components and packing ma terials imported by FIEs for producing goods for 
export are imports in bond subject to the supervis ion of the Customs.  By-products, substandard 
products, and industrial surplus left over by foreig n invested enterprises while producing goods for 
export, which was in bond, therefore shall pay import duty when sold domestically.  However, 
Canada seems to regard this paymen t of import duty as a type of tax of "repayment tax", which in fact 
does not exist. In China's view, in this case there involves on subsidy at all.   
 
• In addition, could China please explain how this programme complies with China's 
WTO obligations, particularly with regards to Article 3.1 of the ASCM?   
 
Reply  
  In view of the explanation to the question a bove, China believes there is nothing inconsistent 
with China's WTO obligation.   
 
• Could China please provide an explanation of, as well as the legislation guiding, 
"repayment tax"?   
 
Reply
 
 
 As mentioned above, from the wording of the question it seems that the policy is 
misunderstood by Canada.  The original wording of th e policy was:  "the wastes confirmed to be of no 
commercial value may be exempt from paying such tax"  (import duty).  However, Canada regarded it 
as a category of tax called "repayment tax" which in fact does not exist.    
• Could China also provide information regarding the amount of repayment tax 
forgone under this programme and the industr ies which have been the largest users 
of the programme? 
 
Reply
 
 
 With the answers to the previous questions, it is the view of the Chinese side that this 
question is not applicable.   G/SCM/Q2/CHN/27 
Page 16  
 
  Question 11 
  Concerns have been raised regarding alleged subsidies provided by the Government of 
China to the Chinese iron and steel industries,  however, Canada not es that there are no 
subsidies specific to the iron or steel sectors mentioned in China's 2006 new and full subsidy 
notification.    
• Could China please provide information on any government assistance (i.e., tax refunds, 
grants, discounted interest rates, funds fo r research and other policy support) made 
available to the iron and steel industries in  China during the period under review (i.e., 
2001-2004)?   
 
• Could China please confirm that it does not ma intain subsidies specific to the iron and 
steel industries? 
 
Reply
 
 
 On the above two questions, China does not ma intain subsidy specific to the iron and steel 
industry.  
Question 12 
 
 Concerns have been raised regarding funding provided by the Government of China 
under the Central Foreign Trade Development Fund.  According to information received by the 
Government of Canada, the Central Foreign Trade Development Fund, established in 1996, is 
managed by the provinces under the direction of the Chinese Ministry of Commerce (MOFCOM).  It also appears that a Chinese ba nk, the ICBC, is responsible for managing the 
transactions under this Fund.  The alleged pur pose of the Fund is: to regulate and promote 
foreign trade; to encourage the development an d export of new electronic, deep processing, 
high-tech and high value-added products; and to increase Chinese export capacity and 
competitiveness.  Canada notes that no such  subsidy was mentioned in China's 2006 new and 
full subsidy notification.    
• Could China please confirm the existence of  the Central Foreign Trade Development 
Fund (or similar programme)?   
• Could China please provide the guidelines for the functioning of this Fund?   
• Could China please provide information regarding the dollar value of the Fund?   
 
Reply
 
  In terms of the three questions mentioned above , according to Chapter 9 of the Foreign Trade 
Law of the People's Republic of China, China estab lished a central foreign trade development fund.  
The fund neither is contingent upon export perform ance nor constitutes a specific subsidy as defined 
in the SCM Agreement.  The principle of the fund is as follows: to promote foreign trade, to promote 
balanced development of foreign trade in different regions, to facilitate the establishment of domestic 
consumption market system, to accelerate the building of public information service system to provide public products and services, and to strengthen personnel training.   
 
 
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